Gold Stock Still in Rally Mode
10/11/2012 9:35 am EST
This stock has already had a pretty good run this year, but there's plenty left...especially if gold keeps rising, reports Kuen Chan of The Complete Investor.
Franco-Nevada (FNV) is a well-run company that offers more leverage to gold than a gold ETF, while mostly avoiding the risks inherent in mining companies.
The reason: as a pure royalty play, the company has no direct involvement in mine development or production. As a result, it avoids the risks—such as rising development and production costs, workforce disputes, and environmental and geopolitical concerns—that mining companies face.
Instead, under its attractive business model, Franco-Nevada simply invests in mining companies under royalty agreements that are largely revenue-based. This means that it receives rising streams of money when gold prices rise, even if miners’ profits are constrained by rising costs.
Of course, Franco-Nevada isn’t totally immune to miners’ problems. If production drops at a mine it has invested in, that particular revenue source shrinks.
But the company is well diversified, with a portfolio of 43 currently producing assets and a total of more than 200 royalty-yielding assets. Some 81% of revenues come from assets in business-friendly US, Canada, and Mexico, so the geopolitical risk is small.
The balance sheet is terrific, with almost $1 billion in cash and cash equivalents as of the end of the second quarter and no debt, giving the company plenty of firepower to add more properties.
Despite its strong run—up 40% this year—FNV remains a buy.